What Advisors Need to Know About the Military’s New Retirement System

Working with a financial advisor helps career military families stay focused on retirement savings, which will be more important with significant changes coming to the pension plan.

The First Command Financial Behaviors Index found that 65 percent of military families who work with a financial advisor say they are extremely or very likely to consult with their advisor for help making retirement system choices compared to 24 percent of those without an advisor.

They may need the assistance with a new system going into effect.

“The military’s new Blended Retirement System is keeping retirement planning at the top of financial concerns for many career military families,” said Scott Spiker, chairman and CEO of First Command Financial Services. “Financial advisors are helping their career military clients engage in the kinds of positive financial actions that will help them feel more certain in the pursuit of long-term financial security.”

Administered by the Department of Defense, the Blended Retirement System reduces guaranteed military pension income by 20 percent and introduces lump-sum bonuses and 401(k)-style contributions.

Service members who enter the military as of Jan. 1, 2018, will be automatically enrolled in the new system. The plan is also available to many current service members, specifically those who will have less than 12 years of service as of Dec. 31, 2017. They can stay with the old retirement system or opt in to the new one.

“This change mirrors an approach corporate America took four decades ago, when employers traded the defined benefits of pensions for the defined contributions of 401(k) plans,” Spiker said.

Under the option of a cash buy-down of their guaranteed military pension, retiring service members will be able to receive a portion of their pension in the form of a lump sum in exchange for a reduction in pension payments until reaching full retirement age, which is typically 67.

“Service members will be able to take either 25 percent or 50 percent of their pension as a lump sum and the pension will be reduced accordingly,” Spiker said. “The buy-down option is intended to save the government money long term but it’s a cost savings heaped on the backs of our service members because it adds increased complexity and risk to the retirement decision.”

At a time when retirees are attempting to turn the accumulated value of 401(k) plans into guaranteed income streams for retirement, this option could result in the exact opposite.

“I’m not surprised to hear of these changes,” said Walter Pinckney, who wrote a book and launched a website to help his fellows navigate within the military bureaucracy. “When a person serves in the military, the risk of life and limb is their contribution and no other should be required. Now we are required to sacrifice our lives and money.”

Juliette Fairley is a business and finance journalist who has written four personal finance books and has written for major news organizations. Juliette can be reached at juliette.fairley@innfeedback.com.